STRATEGIC MANAGEMENT

FOURTH EDITION

Chapter 4
ENVIRONMENTAL
APPRAISAL

AZHAR KAZMI & ADELA KAZMI

 Learning objectives

• Describe the concept of environment in the context of strategic

management
• Name, describe, and demonstrate understanding of eight
environmental sectors
• Describe the process of environmental scanning
• Prepare environmental threats and opportunities profile (ETOP) for
an organization

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 You
are
here

Establishment of
Formulation of Implementation of Strategic
strategic
strategies strategies evaluation
intent

Strategic control

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 Concept of Environment
• Environment literally means the surroundings, external
objects, influences or circumstances under which someone or
something exists.
• The environment of any organisation is the aggregate of all
conditions, events and influences that surround and affect it.
• Since the environment influences an organisation in so many
different ways, its understanding is of crucial importance.
• The concept of environment can be understood by looking at
some of its characteristics.
K. Davis, The Challenge of Business (New York, N.Y.: McGraw-Hill, 1975):.43

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 Characteristics of Environment
• Environment is complex The environment consists of a number
of factors, events, conditions, and influences arising from
different sources.
• Environment is dynamic The environment is constantly
changing in nature.
• Environment is multi-faceted What shape and character an
environment assumes depends on the perception of the
observer.
• Environment has a far-reaching impact The environment has a
far-reaching impact on organisations.

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 Internal and External
Environment
• The internal environment refers to all factors within an organisation
that impact strengths or cause weaknesses of a strategic nature.
• The external environment includes all the factors outside the
organisation which yield opportunities or pose threats to the
organisation.
• The environment in which an organisation exists can, therefore, be
described in terms of the strengths and weakness existing in the
internal environment and the opportunities and threats operating in
the external environment.

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 Environmental Influences
Internal environment:
• Strength is an inherent capacity which an organisation can use to
gain strategic advantage.
• Weakness is an inherent limitation or constraint which creates
strategic disadvantages.
External environment:
• Opportunity is a favourable condition in the organisation's
environment which enables it to consolidate and strengthen its
position.
• Threat is an unfavourable condition in the organisation's
environment which creates a risk for, or causes damage to, the
organisation.

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 General versus Relevant
Environment
General Environment:
In a wider sense, the external environment encompasses a variety of
sectors like international, national, and local economy, social changes,
demographic variables, political systems, technology, attitude towards
business, energy sources, raw materials and others resources, and many
other macro-level factors.

Relevant Environment:
The immediate concerns of any organisation are confined to just a part of
the general environment which is of high strategic relevance to the
organisation. This part of the environment could be termed as the
immediately relevant environment or simply, the relevant environment.

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The Business Environment of
an Organisation

ORGANIZATION

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 Environmental Sectors
• The classification of the general environment into sectors helps an
organisation to comprehend the different influences operating and relate
them to its strategic management process.
• Depending on a variety of factors such as the size of the organisation, level
and scope of activities, geographical spread of markets, nature of product,
type of technology used, level of uncertainty faced, and managerial
philosophy, an organisation may divide its environment into sectors capable
of being analysed conveniently.
• These eight sectors of the environment include economic, international,
market, political, regulatory, socio-cultural, supplier, and technological
sectors. We will now take up each of these sectors for discussion .

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 Economic Environment
The economic environment consists of macro-level factors:
• The economic stage in which a country exists at a time such as agrarian,
industrial or post-industrial economy
• The economic structure adopted, such as a capitalistic, socialistic or mixed
economy
• Economic policies such as industrial, monetary, fiscal policies.
• Economic planning such as 5 year plans, annual budgets, etc.
• Economic indices like national income, distribution of income, rate and
growth of GNP, per capita income, disposable personal income, rate of
savings and investments, value of exports and imports, the balance of
payments, etc.
• Infrastructural factors such as financial institutions, banks, modes of
transportation, and communication facilities, etc.

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 International Environment
The international (or global) environment consists of all those factors that
operate at the transnational, cross-cultural or across- the-border level having
an impact on the business of an organisation

• Globalisation, its process, content and direction

• Global economic forces, organisations, blocs, and forums
• Global trade and commerce, its processes and trends
• Global financial system, sources of financing, and accounting standards
• Geopolitical situation, equations, alliances, and strategic interests of
nations
• Global demographic patterns and shifts

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 International Environment

Some of the important factors and influences operating in the international

environment are as below.
• Global human resource: institutions, availability, nature, quality of skills
and expertise, mobility of labour and other skilled personnel.
• Global information system, communication networks, and media.
• Global technological and quality systems and standards.
• Global markets and competitiveness.
• Global legal system, adjudication and arbitration mechanisms.
• Globalisation of management and allied disciplines and diffusion of
management techniques in industry.

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 Market Environment
The market environment factors and influences are as follows:
• Customer or client factors such as the needs, preferences, perceptions,
attitudes, values, bargaining power, buying behaviour and satisfaction of
customers.
• Product factors such as the demand, image, features, utility, function,
design, life cycle, price, promotion, distribution, differentiation,
availability of substitutes of products or services.
• Marketing intermediary factors such as levels and quality of customer
service, middlemen, distribution channels, logistics, costs, delivery systems
and financial intermediaries.
• Competitor-related factors such as the different types of competitors, entry
and exit of major competitors, nature of competition, and relative strategic
position of major competitors.

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 Political Environment

The political environment factors and influences are below:

• The political system and its features like nature of the political
system, ideological forces, political parties and centres of power.
• The political structure, its goals and stability.
• Political philosophy, government's role in business, policies and
interventions in economic and business development.
• Political processes like operation of the party system, elections,
funding of elections, formation of governments and legislation with
respect to economic and industrial promotion and regulation.

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 Regulatory Environment
The regulatory environment factors and influences are:
• The constitutional framework, directive principles, fundamental
rights, and division of legislative powers between the Central,
State, and local governments.
• Policies related to licensing, monopolies, foreign investment, and
financing of industries.
• Policies related to distribution and pricing, and their control.
• Policies related to imports and exports.
• Other policies related to the public sector, small-scale industries,
sick industries, development of backward areas, control of
environmental pollution and consumer protection.

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 Socio-Cultural Environment
• Demographic characteristics such as population, distribution, age, inter-
state migration, rural-urban mobility, income distribution etc.
• Socio-cultural concerns such as pollution, corruption, mass media,
consumerism, role of business in society etc.
• Socio-cultural attitudes and values, such as expectation of society, social
customs, beliefs, rituals, lifestyle pattern, materialism etc.
• Family structure and changes in it, attitude towards and within the family,
and family values.
• Role and position of men, women, lesbian, gay, transgender, children,
adolescents, and aged in family and society etc.
• Educational levels, awareness and consciousness of rights, work ethic of
members of society and attitude towards minority and disadvantaged
groups.

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 Supplier Environment

The supplier environment factors and influences are below:

• Cost, availability and continuity of supply of raw materials, sub
assemblies, parts and components.
• Cost, availability and the existence of sources and means for supply of
plants and machinery, spare parts & after-sale service.
• Cost and availability of finance for implementing plans & projects.
• Cost, reliability and availability of energy used in production.
• Cost, availability and dependability of human resources.
• Infrastructural support and ease of availability of the different factors of
production, bargaining power of suppliers, and existence of substitutes.

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 Technological Environment
The technological environment consists of factors related to knowledge
applied, material & machines used in the production of goods & services
that have an impact on business of an organisation:
• Sources of technology like company sources, external sources, and foreign
sources; cost of technology acquisition; collaboration in, and transfer of,
technology.
• Technological development, stages of development, change and rate of
change of technology, and research and development.
• Impact of technology on human beings, the man-machine system, and the
environmental effects of technology.
• Communication and infrastructural technology in management.

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 Environmental Scanning
Environmental scanning is the process by which organisations monitor
their relevant environment to identify opportunities & threats affecting
their business for the purpose of taking strategic decisions.

Factors to be Considered for Environmental Scanning:

• Events are important and specific occurrences taking place in different
environmental sectors.
• Trends are the general tendencies or the courses of action along which
events take place.
• Issues are the current concerns that arise in response to events and trends.
• Expectations are the demands made by interested groups in the light of
their concern for issues.

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 Approaches to Environmental
Scanning
Kubr suggested three approaches as mentioned below:
• Systematic approach Under this approach, information for environmental scanning
is collected systematically. Information related to markets, customers, changes in
legislation, regulations, government policies pertaining to the organisation's
business and industry, etc. could be collected continuously to monitor changes and
take the relevant factors into account.
• Ad hoc approach Using this approach, an organisation may conduct surveys and
studies to deal with specific environmental issues to evaluate existing strategies or
devise new strategies.
• Processed-form approach For adopting this approach, the organisation uses
information in a processed form available from different sources both inside and
outside the organisation.

M. Kubr (Ed.) Managing a management development institution (Geneva: International Labour Organisation, 1982): 88 - 89.

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 Sources of Information for
Environmental Scanning
• Documentary or secondary sources of information like different types of
publications. Like newspapers, magazines, journals, books, trade and industry
association newsletters, government publications, annual reports of competitor
companies etc.
• Mass media such as radio, television and Internet.
• Internal sources like company files and documents, internal reports and
memoranda, management information system, databases, company employees,
sales staff, etc.
• External agencies like customers, marketing intermediaries, suppliers, trade
associations, government agencies, etc.
• Formal studies done by employees, market research agencies, consultants and
educational institutions.
• Spying and surveillance through ex-employees of competitors, industrial espionage
agencies, or by planting 'moles' in rival companies.

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 Methods and Techniques Used
for Environmental Scanning
• The range of methods and techniques available for environmental scanning is wide.
There are formal and systematic techniques as well as intuitive methods available.

• Strategists may choose from the methods and techniques those which suit their needs
in terms of the quantity, quality, availability, timeliness, relevance and the cost of
environmental information.

• The environmental techniques are based on statistical methods, artificial intelligence,

neural networks, data mining, knowledge based system, use of sophisticated
software, computer assisted environmental scanning and forecasting, while some of
them, like scenario-writing, may not use statistical information but employ informed
judgement and intuition to predict what the future is most likely to be, expressed in
the form of a descriptive statement or report.

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 Pitfalls in Environmental
Scanning
• Sometimes strategic planners may focus so excessively on the influences in the
relevant environment that they miss out the trends and issues in the general
environment that really matter.
• Environmental scanning should not become a number-crunching or paper-pushing
routine that may prevent timely action.
• The purpose of environmental scanning is to uncover influences that matter for the
future of the organisational strategic decision-making.
• Environmental scanning function should not be integrated too closely with the
operational and functional activities of the organisation.
• Similarly, environmental scanning should not be too far from the realities of the
organisation making it an impersonal, staff function.

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 Appraising the Environment
Factors Affecting Environmental Appraisal

• Strategist-related factors Strategists characteristics such as age, education,

experience, motivation level, cognitive style, ability to withstand time pressures
and strain of responsibility have an impact to appraise their organisation's
environment to any given extent.

• Organisation-related factors These characteristics are the nature of business the

organisation is in, its age, size and complexity, the nature of its markets, and the
product or services that it provides.

• Environment-related factors The nature of the environment depends on its

complexity, volatility or turbulence, hostility, and diversity.

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 Identifying the Environmental
Factors
• Environmental scanning results in a mass of information related to different sectors of
the environment. Without a technique to deal with this information, a strategist would
be at a loss to comprehend and analyse the environmental influences.
• Environmental scanning leads to the identification of many issues that affect the
organisation.
• The issues which are most likely to have a high level of impact on the organisations
are the critical issues and need immediate attention of the strategists.
• High priority issues have a medium to high probability of impact while those
currently having a high level of impact but a low probability of occurrence need to be
kept under watch.
• All other issues could be considered as being of low priority but still requiring
continuous monitoring as conditions may change later.

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 Identifying High Priority
Environmental Issues
Impact on Business
_______________________________________________________________________________
Probability of impact High Medium Low
-------------------------------------------------------------------------------------------------------------------------
High Critical High priority Low priority
-------------------------------------------------------------------------------------------------------------------------

Medium High priority High priority Low priority

-------------------------------------------------------------------------------------------------------------------------

Low To be watched Low priority Low priority

_______________________________________________________________________________

Source: Adapted from the W. R. Boulton, Business Policy: The Art of Strategic Management (New York: Macmillan
Publishing Co., 1984):120.

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 Structuring Environmental
Appraisal
• Structuring the environmental appraisal is a difficult process as environmental
issues do not lend themselves to a straightforward classification into neat
categories.

• A technique, suggested by Glueck, is preparing an environmental threat and

opportunity profile (ETOP) for an organisation.

• The preparation of ETOP involves dividing the environment into different sectors
and then analysing the impact of each sector on the organisation. A comprehensive
ETOP requires subdividing each environmental sector into sub factors and then the
impact of each sub factor on the organisation is described in the form of a
statement. A summary ETOP may only show the major factors for the sake of
simplicity.

W. F. Glueck and L. R. Jauch, Business Policy and Strategic Management (New York: McGraw-Hill, 1984): 120-121.

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